Thursday, November 06, 2008

The Obama Crash

Stocks fell by more than 5% today for the second day in a row, making it the worst 2 day slump since 1987. Now, what was it that happened 2 days ago that could possibly make investors flee stocks.......

Now, to be sure, given how erratic the stock market has behaved in the last 2 months or so, this sell-off may be related to something else. But regardless of to what extent investors actually sold off because of the Obama victory, the real point is that they should have done so.

With Obama as president, not only will the economy slump even more than it otherwise would have done, but Obama will also slap U.S. multinational companies with extra taxes on the profits of their foreign subsidiaries. A kind of de facto tariff that only applies to U.S.-based companies, while their foreign based competitors This will lower the present value of future profits from these subsidiaries, which in turn implies that the fundamental value of U.S. stocks will decline. So, while we can't be sure that the investors who have sold stocks in the last 2 days have been aware of this, we can be sure that the price movement their actions generated mimicked the rational response to the Obama victory.


Anonymous Anonymous said...

Hi and thank you for a good and interesting blog.

However - I find it unlikely that the stock markets has been falling due to Obama's victory. As you most surely know the odds at the betting office etc. for Obama winning was REALLY close to one i.e. no one found it suprising that Obama won the election.

Hence; the dip in the stock market cannot be explained with the election - the previous baerish couple of days might have contributed though...


11:03 PM  
Blogger stefankarlsson said...

Olle-first of all the point wasn't that the sharp decline in Obama's victory really was motivated by his victory but rather that it should be considering that his policies will reduce the fundamental value of stocks.

And secondly, betting offices contain radically different groups of investors than stock markets, so even if your number is correct it doesn't say anything about the expectations of stock investors.

11:44 PM  
Blogger flute said...

Wasn't this just a simple case of "buy the rumour, sell the news".
We've also had some dismal news on the financial markets over the last two days.

10:57 AM  
Blogger Justin Hayes said...

This assertion does however assume policy implementation will occur as proposed prior to a major economic downturn without consideration based on current and/or future economic conditions. Obama has demonstrated a preference for consideration given facts and advice rather than based on arbitrary and passed decision making (sometime called flip-flopping, but i prefer the term reality-based).

I would be warry to make assertions that the future value of stocks is lower on the basis of potentially higher taxes in the future, without and certainty as to the type, target, and level of such an increase. Investors who are selling in anticipation of rash implementation of campaign proposals are hardly investors, but speculators, who are useful in their own right, but for different reasons.

7:30 PM  

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